Acadia Healthcare Company Inc (ACHC) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2005 Pioneer Behavioral Health earnings conference call. My name is Shawn and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS)

At this time, I would like to turn the presentation over to Mr. Matt Hayden of Hayden Communications. Please go ahead.

Thanks Shawn and thank you. Good morning and we'd like to thank everyone for joining us today for PHC's fiscal 2005 third quarter earnings conference call. Earnings were released this morning. If anyone needs a copy of the release, please feel free to contact my office, Jennifer Heady (ph) at 843-272-4653.

Our call today will be hosted by Bruce Shear, President and Chief Executive Officer. As was mentioned, following management's discussion, there will be a formal Q&A session open to those participants on the call. There will also be a playback available until May 18th.

To listen to the playback, the number is 888-286-8010 if calling in the U.S., and if calling internationally, it's 617-801-6888, and the pass code for the replay is 47504642. Before we get started, I'm going to take care of some of the housekeeping items such as reading the Safe Harbor statement.

Statements in the conference call that are not descriptions of historical facts are forward-looking statements that are made subject to risks and uncertainties. Words such as expect, intends, believes, plans, anticipates, approximately, and likely, also identify forward-looking statements. All forward-looking statements (inaudible) current facts and analysis.

Actual results may differ materially from those currently anticipated due to a number of factors, including, but not limited to, history of operating losses, anticipated future losses, competition, future capital needs, and need for market acceptance, dependence upon third parties, disruption of vital infrastructure, disruption of services, and any items due to natural disaster.

All forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. Additional information on factors that may affect the business or financial results of PHC can be found in its filings with the SEC. Bruce, I'd like to congratulate you on another record quarter for both revenues and earnings with impressive growth across all three operating units.

At this time, I'd like to turn the call over to you to provide a summary of the financials and more detail surrounding the quarter.

Thank you, Matt, and good morning. As Matt mentioned, our press release was reported this morning. We have a new format and we're in our effort to continue to provide additional information to the market and we appreciate any feedback that you have on that at some point after the call.

This format change came as a result of some of our significant investors making some suggestions to improve kind of the information they'd like to see. But good morning, thank you all for joining us. I'm pleased to report today that we have continued the positive momentum of our first 6 months, reporting a record third quarter from both the revenue and net income perspective.

As Matt indicated, we saw significant growth in all 3 of our operating units, further validating our business plan. While revenue grew 35%, our operating expenses increased only 8.8%, demonstrating the operational leverage our business model provides. Let me get right into the numbers.

For the third quarter, total net revenue increased 35.4% to $8.8 million from $6.5 million for the third quarter ended March 31, 2004. Net patient care revenue increased 20.6% to 6.7 million for the third quarter from 5.6 million for the third quarter last year.

This increase in revenue is due primarily to the addition of the 30 new adjudicated beds at Detroit Behavioral Health Institute, DBI, which helped create a 22.4% increase in patient days for the quarter. Our facilities in Yutan (ph), Virginia also contributed to this growth as they both had strong quarters.

We finished the quarter at capacity in DBI and renovations are already under way to open the next 20 beds, which we expect to occur during the month of July. We have also initiated new marketing efforts which have helped to maintain census thus far in the fourth quarter.

Revenue from pharmaceutical studies increased 611% to 1.1 million for the third quarter from $155,000 for the third quarter last year. This increase is due to the acquisition of Pivotal Research Centers on April 30, 2004. Pivotal is currently engaged in 24 enrolling studies and providing care in a total of 58 studies and we also continue to grow our pharmaceutical research effort in Michigan and in Utah.

Contract support services revenue provided by Wellplace increased 26% to $925,000 for the third quarter, from $733,000 for the third quarter of last year. This increase in revenue is due to the October, 2004 increase in the services of the Michigan call center contract, which increased the monthly revenue that we provide - that we received from Wellplace.

Patient care expenses increased 24% to 4 million for the third quarter compared to 3.2 million for the third quarter last year. The increase in expenses is due primarily to the increase in in-patient days with the majority of the increases in expenses directly related to patient care.

Contract support services expenses decreased 4.8% to $520,000 for the third quarter, from $546,000 for the third quarter last year. This decrease is a result of more efficient use of staff and the elimination of a smoking cessation contract that was very labor intensive.

Provision for doubtful accounts, a very important metrics, increased 4.2% to $217,000 for the third quarter from $227,000 for the third quarter last year due to a decrease in the age of the company's receivables and the company's policy to maintain reserves based on the age of those receivables.

We've discussed receivables and collections in previous calls, and as I mentioned, this is a key metric and a significant challenge for the company. I'm pleased with the work we've done to manage this important expense. Administrative expenses decreased 2.8% to 3 million for the third quarter from 3.1 million for the third quarter last year.

As you may recall, the third quarter of last year included legal and settlement expenses related to a matter which involved a unit that we acquired. These non-recurring expenses impacted the comparison. This year third quarter also included increased administrative expenses related to the Pivotal operation and the new facility in Michigan.

Net income to common shareholders for the 3 months was a record $880,456 or five cents for a basic and fully diluted share. We're ecstatic about these numbers. This compares to a loss last year which included non-recurring legal and settlement expenses of $845,000 per basic and diluted share for the third quarter.

Net income increased sequentially from the second quarter 115.4% compared to 408,000 reported in the company's second quarter of fiscal 2005. So not only do we have a record quarter, we had a significant sequential increase in both revenue and profit from just our previous quarter.

This year third quarter included 18.7 million diluted shares outstanding compared to our third quarter of last year, which included 14.4 million shares outstanding. Total net revenues for the 9 months increased 30% to $24.8 million for the 9 months from 19.1 million for the 9 months ended March 31, 2005.

Net patient care revenue increased 15.8% to 18.9 million for the 9 months ended March 31, 2005, from 16.3 million for the same period last year. The 30 new adjudicated beds at DBI helped to create a 13.3% increase in patient days for the 9-month period.

Revenue from pharmaceutical studies increased 576% to 3.4 million for the 9 months, from 500,000 for the same period last year due to the acquisition of Pivotal Research Centers LLC on April 30th, 2004. Again, the comparative numbers, the 9 months numbers, all three business units, are moving in a very positive direction and in line of what our expectations were.

Contract support services revenue provided by Wellplace increased 12% to 2.5 million for the 9 months from 2.2 million for the same period last year, due again to the October, 2004 increase in the Michigan call center services contract. Patient care expenses increased 19.4% to 10.8 million for the 9 months, from 9 million for the 9 months ending March 31, 2004.

Pharmaceutical studies account for approximately 13% of the increase in patient care expenses for the 9 months. Contract support services expenses decreased 4.3% to 1.6 million for the 9 months ended March 31, 2005, from 1.7 million for the same period last year. Provision for doubtful accounts decreased 28.1% to $800,000 for the 9 months, compared to 1.1 million for the same period last year.

Good receivables management, strong positive cash flows were contributing factors there. Administrative expenses increased 19.6% to 8.9 million for the 9 months, from 7.4 million for the same period last year. A portion of the variance was due to legal and settlement expenses last year which was more than offset by incremental expenses related to Pivotal and DBI this year.

In addition to the expenses related to Pivotal and other individual expenses, including general insurance expenses, utilities, rent expenses, fees and license expenses, and a newly instituted Michigan quality assurance assessment fee, were responsible for the increase in the administrative expenses.

Debt income applicable to common shareholders for the 9 months was a record $2.1 million or 12 cents per share, 11 cents full diluted, compared to a net loss of 789,000. Again, that includes the one-time non-recurring expense. The company's provision for income taxes of $98,469 for the 9 months ended March 31, 2005 is significantly below the Federal Statutory rate of 34%, primarily due to the availability of net operating loss carry-forwards.

Total income tax expense for the 9 months ended March 31, 2004 represents state income taxes for certain subsidiaries with no available net operating loss carry-forwards. The company has provided a significant valuation allowance against its deferred tax asset due to potential changes in IRS rules that may limit the accessibility of the loss carry-forwards going - in the future.

Currently, the collective net offering loss carry-forwards is approximately $8 million. The company anticipates paying minimal taxes through fiscal 2006. Turning to the balance sheet, we show continued improvement and reported a current ratio of 1.4 to one as of March 31st.

Shareholders equity increased 46.2% to $7.8 million on March 31, 2005, from $5.4 million on June 30, 2004. With the numbers out of the way, I'd like to briefly discuss our initiatives and our focuses going forward. As I mentioned, we are currently operating at capacity of the Phase I of our new DBI facility.

We expect the next 20 beds to open during July, increasing our bed capacity with an eventual target of 114 new acute and long-term psychiatric and adjudicated beds. Our goal is to - was to reach 90% capacity utilization by the fourth quarter. We've already exceeded that goal of the 30 beds open.

Clearly, there is significant demand in this region for our services and we are gratified that we are able to serve this community. This remains a high growth market for our company. Specifically, our next focus is rollout of the next two phases, with Phase II plans to open in July with 20 beds.

That's expanding the revenue opportunity and allowing us to leverage the fixed costs we've incurred as startup expenses at this facility. As a reminder, the expansion will significantly increase the number of beds we operate from 160 to 244, with a total estimated capital expenditure of somewhere in the vicinity of $500,000.

Once fully operational, we expect the first two phases to contribute 5 million in annualized revenue with operating margins of 10% or greater. Again, this will continue to fuel our pipeline revenue growth as our company rolls out its expansion plans.

Once the last phase is open, we estimate that collectively, these new beds will contribute $14 million in annual incremental revenue for Pioneer. It's been one year since we acquired Pivotal and this acquisition has exceeded our expectations. The leadership team has contributed to the strong growth in revenues, and we continue to be very pleased with the results.

Pivotal is currently engaged, as we mentioned, in 24 enrolling studies and has approximately 58 studies providing care. While there's been a slight slowdown in the number of trials coming to the market, Pivotal was very diversified and not reliant on any particular sponsor, so while growth was not as robust as it could have been in the last quarter, the year-over-year comps have continued to help PHC report solid record results.

Geographically, our sites are positioned well and CNS studies continue to be one of the fastest growth indications in research. Our well placed divisions showed positive revenue growth over the third quarter and our margins in this division continue to improve as we generate revenues from our new contracts.

Once again, looking forward, we're excited with the record results of the quarter and the 9 months to date. We continue to grow profitably across all 3 divisions. We have additional opportunities to expand our market share and our gross margins by leveraging our fixed infrastructure and services expertise across a broader revenue base.

Our policy remains to not issue formal guidance, but we feel comfortable reiterating that the fourth quarter, we continue to - that for the fourth quarter and going forward, we will continue to expect to see year-over-year revenue growth between 25 and 30% with positive year-over-year earnings comparisons. Again, I'm ecstatic about our results.

Our management team is performing at expected levels. We're excited about our future. We have many, many opportunities on our plate. I see no reason why, if we continue to execute, which is my job to make sure that we do, that we won't continue to see good top line growth, good bottom line growth, and making a major contribution to helping people suffering from mental and psychiatric illnesses and substance abuse problems.

I'd like to thank you all for joining the call today. At this point, we can open it up to some questions for the group. We have a very, very large participant base here, so I want to apologize in advance if we're not able to field (ph) all of your questions.

As in the past, I'm always available to talk with the shareholders and the investors. You can feel free to contact us directly at our office at 978-536-2777 or go to our Web site for more information at www.phc-inc.com.

Shawn, if you'd like, we can set up the queue for questions and start rolling them out.

Thank you, sir. Ladies and gentlemen, if you wish to ask any questions at this time, please dial star, followed by one, on your touch-tone keypad. If your question has been asked or answered and you wish to withdraw, please dial star, two. Again, dial star, one, to ask any questions and we'll pause for just a moment while we register the list.

And again, ladies and gentlemen, the command to ask a question is star, one.

Do you have the first question for us, Shawn?

The first question comes from the line of Jim Kennedy, Marathon Capital Management.

Hi Bruce.

Good morning, Jim, how are you?

Good. Congratulations to you and the management team on a great quarter and a great 9 months. I look forward to many more. A question for you on Pivotal. Could you give us a little color? You had said something about some of the expected studies, either not materializing or there being a temporary lull there.

That's the first issue as to why that might be occurring given the number of drugs in the FDA pipeline that would seem to fit that mode. And then secondly, what is the current capacity of Pivotal or of the organization to conduct studies? I mean, are you at 70% capacity, 80% capacity?

And if more studies materialize over the course of this year, if you are at somewhat capacity constrained, how do you expand to meet those needs or do you need to?

Well, first of all, I think the slowdown has been an industry slowdown and we've seen in terms of talking to people in the field and talking with some of the sponsors that many studies have been pushed back as the term is called in our industry, not eliminated or stopped.

And there can be a number of reasons for that, problems producing the drugs, not getting their IRB (ph) approvals, having some kind of a delay in getting the advertising on line. So there haven't been any studies that have been eliminated from the queue, but what we've seen is sort of a slowdown, and I think we've seen that nationally.

You know, the good news is that, you know, the locations that we're in are strong locations. We don't have a lot of competition, so you know, I believe that starting - actually we've seen a turn in May already. And you know, we feel that again, the psychiatric field is a strong, one of the top 3 indications for drugs in the research pipeline, so I see this continuing to be very positive and a growth industry.

In terms of capacity, capacity is generally related to how many employees we can have to see the patients and the good news with this model is, as we get more studies, it's a matter of adding a study coordinator. Our locations are large enough and we have enough flexibility in the timing, so it's incremental staffing costs and not other huge incremental costs. So there's no reason why we won't continue to grow in this regard.

So in terms of having some additional studies later this year or increased demand, ramping up for that is a relatively short-term process?

Correct, and we're already doing that based on the - now the increase in the study flow and sort of the loosening up of the time period.

Okay, great. Thanks a lot.

Thanks, Jim.

And your next question comes from the line of John Peterson with AG Edwards.

Good morning, Bruce. Congratulations again on a great quarter and actually for the last 9 months. My question to you is, has the company considered transferring from the Boltzen (ph) Bar to either the Amex (ph) or some other exchange? And if so, what would be the timing of that?

Nice to hear from you again, John, a long time.

Thank you.

And thanks for calling in. Obviously, we're looking for a larger national exchange and the timeframe is immediate and we've looked at - we've looked at the Amex and we've had ongoing discussions with them. And I think we're on the right track there and so it's as immediate as it can happen.

Okay. Thank you, Bruce.

And your next question comes from the line of Walter Young with Thompson Davis.

Good morning, Bruce. How are you?

Good morning, Walter.

Can you go a little further - your Phase II with the 20 beds in July and kind of run through the rest of the 114 bed schedule as you see it now?

Yes. The last phase is the 54 acute beds and I believe that we're on track, and again, you know, whenever I make a projection in terms of the date we're going to open, I'm generally not 100% on track, but we're looking at most likely early calendar 2006 in the company's third fiscal quarter of the current year.

I like the way we're rolled this out and the demand for the second unit is even stronger than the first, so you know, as you and I have had this discussion in the past, it's important that we continue to show both top and bottom line growth. So the timing of that and also just in terms of the renovations though, I believe we'll be, you know, keyed in that regard.

But I would not anticipate seeing the 54 beds coming on line until calendar 2006, sometime in the company's fiscal third quarter.

Very good. Thanks.

Walter.

And again, ladies and gentlemen, as a reminder, please dial star, one, to ask any questions.

Your next question comes from the line of Shane Kim (ph) with Canyon Partners (ph). Please go ahead.

Good morning, Bruce, great quarter. Just a quick question on the DBI facility running at 100%. How many beds are there?

30 beds in the first unit.

And at what - was DBI running at capacity during the quarter or are you just sort of making a commentary currently that it's running at 100%?

We hit capacity late in this - in this quarter that we just reported.

Okay, great. Okay. Good quarter.

Thank you so much. Thanks for joining us. Well, we have time for one more question if there's anyone in the queue. And I don't see anyone.

Sir, you do have one question left from John Evans. Please go ahead.

Hi Bruce. I was curious if you could give us some insights on the bad debt or the receivables and just is it improved substantially? Can it get much better than here and can you give us some insights into that?

Well, you know, can it get much better? Yes. Are we projecting it to get much better? Probably not. I'd love to have a pleasant surprise. We're doing better than the industry. We have some very strong collection procedures in place by utilizing both credit cards, attempting to get as much of a cash deposit as possible, and we've made great, great progress.

We're doing better than our industry and as you can see, bad debt expense for the 9 months this year is lower than last year. Receivables are managed very, very well. So you know, I think we're in a very good position here. Am I going to project that it's going to be better? No. Could it be? Yes, but - and that will just be a pleasant surprise.

Okay. Thank you so much.

Okay, we don't have any other questions right here. We have a huge audience out here today, the largest audience we've ever had and again, we're ecstatic about the results. We really can't complain about record revenue for the company, record profitability, sequential revenue growth, sequential profitability growth, and more importantly than that, is the future.

We're excited about the future. As I mentioned before, Pioneer and this country is in the middle of a mental health crisis and we are a major and a significant provider to provide health to those suffering from mental illness, psychiatric illnesses, and substance abuse illnesses. The government is strongly supporting it, reimbursement is improving. It's highly recognized.

It's out from behind the scenes, so there's no reason why our industry won't continue to be strong. We have the right management team in place to continue to grow profitably and to continue to execute and provide high-quality care to people in need in this country and also to provide a reasonable return to our shareholders who have been strongly supportive of our company.

Thank you all for joining us and I look forward to talking with you off line.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Good day.